EUR 850.00 For Business Accounts Only

Morningstar | Moutai's 3Q Results Largely Miss; Trimming Our FVE to CNY 670; Shares Are Undervalued. See Updated Analyst Note from 30 Oct 2018

Wide-moat Kweichow Moutai’s third-quarter results largely missed our expectations, with revenue and net profit growing only 3.2% and 2.7% year on year, respectively. Although the declining advance payments from distributors have revealed weakened demand, the underperformance still surprised us. We think this was mainly owing to the high base of 116% revenue growth in the year-ago period (Moutai increased its shipments last year to stabilize the price for the strong demand) and worse-than-expected volume demand for the Mid-Autumn Festival and National Day holidays. Kweichow Moutai’s third-quarter profit growth was the lowest among the premium baijiu makers, compared to Wuliangye Yibin’s 19.6% and Jiangsu Yanghe’s 21.5% profit growth during the same period.

We maintain our wide moat rating but cut our fair value estimate for Kweichow Moutai to CNY 670 per share from CNY 750, as we reduce our profit growth forecasts to reflect lower volume growth of Moutai liquor, given our concern that the demand for premium baijiu will be curbed as the Chinese economy weakens. We now anticipate the company’s revenue and net profit to grow at compound annual rates of 13.4% and 11.9% in the next five years, down from 16.5% and 14.8% previously. We expect short-term share price performance will remain soft as the market worries about weak future demand, but we think the current price provides a good entry point from a long-run perspective, as it is an 18% discount to our new fair value estimate.

Revenue of CNY 18.84 billion was below our forecast, compared with 38% revenue growth in the first half, indicating the sales growth of Moutai slowed in the third quarter. Sales of premium Moutai liquor increased merely 0.6% year on year, while the sales of series liquors grew 32% from last year in the quarter. We estimate the total shipment volume of Moutai liquor was around 8,500 metric tons, compared with 9,200 metric tons in the year-ago quarter. Series liquor demand was still robust and has achieved 83% of the full-year target, given that the company increased its marketing expenses on its series liquor and increased 103 dealers in the quarter domestically to 3,318.

Advance payment from distributors was CNY 11.17 billion by the end of the quarter, increasing from CNY 9.9 billion in the second quarter, mainly due to loosening of the company’s cash collecting policy. The company has shortened its cash collecting policy from several months to one month in order to better control end-channel inventory and prevent a repeat of the speculation seen in 2012. However, we think the increasing balance of advance payments from distributors will not support strong growth in the fourth quarter.

Gross margin in the third quarter was in line with our forecast at 91.4%, improving 1.1 percentage points due to higher ex-factory prices and better product mix (higher sales volume percentage from special Moutai liquor). The sales expense ratio increased 10 basis points year on year to 3.3% for marketing and brand-building, while the administrative expense ratio increased 50 basis points to 6.2%. As a result, net profit increased 2.7% from the prior year to CNY 8.97 billion and net profit margin was 47.6%, down 23 basis points from last year.